The Client Revolution

A corporate lawyer wonders about value billing

A top Boston corporate lawyer who's made a name for himself in the financial industry responded with a thoughtful question to something I wrote earlier. He wanted to know how value billing could work in his environment — a large-firm, corporate-transactional-work practice. To be sure, that's worlds apart from my employment-litigation-defense boutique, but that doesn't mean it can't work for him, too.

Here then is our back-and-forth discussion on the topic, starting with his question:

Here's the million-dollar question on alternative billing from where I sit: I can control everything that happens in a transaction that occurs in my firm, and price around 80% of the various structural things that can complicate a deal. I'd win some and lose some.

The wild card is the opposing lawyer: efficient and competent, or not? How much internal cost do I have to allocate to carrying both ends of the canoe, after setting my fee with the expectation of carrying one end? This seems to me to be the stumbling block for alternative billing in transactional engagements. Thoughts, law-firm revolutionary?

(I think he means me, and not without a tinge of irony.) Thoughts? Yes, many. First, you can't control everything in your firm. You don't know what rabbit trails of online research your junior associates might travel down. You can't always predict if one of your key partners will be overwhelmed with a competing project, or with the flu. Second, if you hold yourself out as an expert — as you should — then you should have enough experience to be able to price things notwithstanding your fellow canoe carrier. Third, why do we think law is any different from everything else? It's not.

Let's say you take a trip to Florida, and your flight cost you X dollars. If a headwind or a storm or congestion around Wilmington, Delaware, caused the airplane to burn up more fuel, will the airline change the price of your ticket after you land? No. Those "variables" didn't change the value to you of your flight. (If anything, the variables made your trip longer and less pleasant, lowering its value to you.) There are variables in everything. Saying "I can't price this because of the variables" is a complete cop-out.

That works for some of my clients, but not all. Clients who tend to use us deal in and deal out see the benefit of pricing in all of the variables. Clients who look separately for counsel for every deal, though, just want the lowest base price. The lawyer who sets a price that factors in all of the variables is going to get killed selling to this second kind of client because the competition will give an estimate based on a smooth execution and add on to that. Because client type 2 here usually purchases on the basis of the lowest base price, the lawyer who successfully prices in all the variables won't get any deals. I'm trying to figure out a way to use alternative billing for the second kind of client — it's much easier for the first.

The easy answer is that you really don't want Type 2 clients. Someone who comes to you for price will leave you for price. So set your price high enough to attract serious clients and weed out those Walmart shoppers.

The more-nuanced answer is that you, like 99.999% of all lawyers, are stuck in the Marxian labor-theory-of-value mindset. You believe that the value of your excellent service is based on the amount of work you have to do to provide it. The funny thing is, your clients don't believe that at all. They, like all customers, measure value subjectively: what it's worth to them at that time.

Plus, your method values all your time equally. To see why that's a problem, read these three posts: — "Billable showers," "What's my time worth?" and "Watching the time go by."

Thou shall not ...

Lawyers love to use the word shall. It seems more impressive somehow than a mere will. Certainly far more regal than going to. (Dueling examples: "I shall attend the inaugural ball." "I'm going to go to Monster Truck World." See?) And we know how lawyers like to sound impressive.

Actually, does anyone ever say shall? Not unless it's spoken by a man in a bowtie and followed by the phrase "... I pour?"

No, it's really only used in writing. Legal writing. Actually, bad legal writing.

You see, shall is the worst word ever.

There are over 1,300 reported cases interpreting it. The word can be used to mean must, may, will, can, is, is entitled to, and should. It is often used to mean different things in the same paragraph, or even the same sentence. This is because lawyers often cut and paste things from other documents without bothering to see how the word was previously being used.

My advice: Don't use it at all. Use must or will or whatever you really mean. Shall is ambiguous and pompous. Shall is weak, and shows that you don't care that much about words. And if you're a lawyer, that means that you're in the wrong line of work.

But don't take my word for it. Check out this excellent article by top plain-English legal-writing professor Joseph Kimble, "A Modest Wish List for Legal Writing." (The "shall" section is at number 11; the rest of the short article is great for other plain-English tips.) And check out this case from the Oregon Court of Appeals that explains how shall doesn't necessarily mean shall.

Lawyers: ask yourselves — do you want to win your cases? If you worry more about sounding impressive and less about the meaning of the words, than you likely shan't.

[By the way, the common but archaic second-person-singular form of shall is shalt, as in "Thou shalt ..." But even lawyers don't do that.]

What if Google billed by the hour?

I'm currently reading Jeff Jarvis's excellent book, What Would Google Do? Jeff is one the world's leading experts on digital journalism, and his blog, BuzzMachine, is terrific. The book's even better.

It's not what you might think: it isn't a history of Larry and Sergey creating Google in a California garage, and there are no fawning descriptions of the employee cafeteria and its free-range doughnuts, or whatever. In many ways, the book is barely about Google itself. Instead, it's about how the world has changed over the past ten or eleven years, and not just in a technological sense. According to Jeff, Google represents a new way of doing business, characterized by a commitment to innovation, a different way of generating revenue, and a dedication to speed, simplicity, and constant improvement. That is why Google is the fastest-growing company in the history of the planet.

So what if Google billed by the hour?

Seems like a ridiculous question, doesn't it? Why would Google bill by the hour for organizing the world's information and letting us all search it?

Google's nothing like a law firm, is it? Let's see:

• The geniuses who work at Google are obviously knowledge workers, and highly skilled ones at that. But wouldn't most lawyers agree that they are highly skilled knowledge workers, too? And many lawyers are geniuses (or believe they are).
• Google culls answers to questions from oceans of information. Certainly any first-year lawyer at a large firm (are there any left?) spends much of her time wading through cases and statutes on LexisNexis.
• Google exists to provide answers. And that's what lawyers are expected to do.

OK. There are similarities. So how would it be different if Google billed hourly like most lawyers?

First of all, you could forget about innovation. Google famously encourages its employees — its knowledge workers — to spend 20 percent of their working time on projects that interest them. This is designed to encourage innovation, and it has led to many of Google's most important projects, such as Gmail, Google News, and AdSense.

By contrast, the most important metric for law-firm associates is hours billed. Bonuses and promotions and even job stability all depend on this magic number, leaving no room for innovation or personal projects. If Google billed hourly, there'd be far less innovation.

Similarly, the watchwords of speed, simplicity, and constant improvement would have to be junked. The core principle of hourly billing is "more time means more money." There is no incentive to get the job done faster. Indeed, there is a disincentive to being efficient and getting jobs done fast, because that would mean less time, fewer billable hours, and less revenue.

What about speed? Google prides itself on its speed. Every search-result page broadcasts how fast it delivered the results you wanted. (For example, I just Googled "hourly billing." The website gloated over the mere 0.35 seconds it took to find 1,580,000 results.) But if Google billed by the hour, its alacrity would cost it money. Goodbye gloating.

As for simplicity, no one ever accused lawyers of worshiping at that altar. Things need to be complex to justify all the hours billed. And constant improvement means spending time on training and development and innovation — all things that detract from billing hours.

Finally, since law firms are run on a cost-plus pricing model, there is no incentive to lower the costs to the clients. That's why even in recessionary 2008, 71% of law firms raised their rates. By contrast, Google developed its AdSense and AdWords models to allow its paying customers (the advertisers) to efficiently and inexpensively buy just the advertising they need, unlike in traditional advertising models. Which is why a company incorporated in 1998 was able to do $22 billion in revenue just ten years later.

But under hourly billing, you can forget about that, too.

The bottom line: under an outdated, labor-theory-of-value system like hourly billing, the most innovative and successful company in history would simply not exist.

So who do you want to be like: law firms, or Google?

Don't come in from the cold

It's been ridiculously cold this winter in Boston. Today, it got as low as 3 degrees Fahrenheit, with a windchill factor of minus 15. In other words, stupid cold.

Speaking of stupid, some businesses have tried to combat this year's frigidity by taping Microsoft Word–written signs at their entrances, asking people to use only the revolving doors and to not hold the regular doors open. The most ridiculous set of signs I've seen is in my very own office building, where Sovereign Bank has a branch. The signs — which like most of these signs have goofy font choices, amateur boldface and all caps, and bizarre punctuation — implore people to keep the bank lobby warm by minimizing the door usage. Best of all is the sign on the control for the handicapped entrance (see photo), which says, "Help us retain heat. Please use only if necessary." Of course, that's kind of the point with a handicapped entrance — it is, by definition, necessary.

From a customer-service point of view, this trend to heat-retention signage shows that so many companies simply don't understand what's important. Here we're talking about Sovereign Bank, which was devastated by bad mortgages and had to be rescued by Spanish bank Banco Santander. Just over a month ago, Sovereign announced it was laying off 1,000 employees, including 131 here in icy Massachusetts.

At a time when the bank is reeling from bad lending decisions and a global credit crisis, do you really want the first thing customers see when they come to a branch to be a bunch of signs saying, in effect, "Keep Out"? Who cares if the tellers are chilly? Wear an extra sweater. Crank up the heat, or get a portable space heater. At a time when your company is floundering, the focus has to be on getting customers in the door, not keeping them out.

Before going to law school, I was a branch manager for a retail bank in Boston; I know firsthand about getting customers into branches. And if I was Banco Santander and owned Sovereign, and I walked over to the One Beacon Street branch and saw these signs, I would fire the branch manager on the spot. If geniuses like this are running our businesses, it will be a long time before our frozen economy begins to thaw.

[Update: Noon Friday — All the signs have now been taken down, just 14 hours after this post was published. To be fair, the temperature has risen to a balmy 22 degrees. But who knows: maybe someone at Sovereign has joined the Client Revolution. I guess there's hope for the economy after all.]

Typewriters and carbon paper — tried and true

Imagine if in the 1970s, the former head of a huge law firm came out against the rise of word processors and their challenge to typewriters and carbon paper. Imagine that he scoffed at this notion of "a better mousetrap," groused that people had been trying to come up with new systems for years without much success, and made a throwaway crack about "young people." People probably would have ridiculed him as a Luddite defending the status quo merely because that was what he was used to. Even if the "better mousetrap" did a better job than the old system.

Sure enough, the former head of a huge law firm recently came out against the anti–billable hour revolution. Richard Gary, former chair of Thelen Reid, was quoted in a California Bar Journal article, "Will a bad economy force more changes in the profession?" Here are Gary's thoughts on typewriters billable hours:

Still, he said, he doesn’t think the billable hour is going to disappear. “We’ve been talking about going to a different model for 20 years and it’s never happened. Maybe young people will come up with a different mousetrap.” However, he added, “I still think it’s the best way to measure value because it is a mechanism of measuring the amount of work that a lawyer did for a client on a particular matter.”

Let's read that again: The billable hour is "the best way to measure value ...."

I don't have too much to add here, other than to point out that Gary now runs his own law-firm consulting shop offering "strategic solutions for law firms."

And the 600-lawyer firm he ran for 11 years, Thelen Reid? Above the Law has the 411 here: "Thelen Officially Dissolves." (Ouch.)

I'm not saying that the idea of billable hours being any measure of client value — let alone the best measure — is what's causing firms like Thelen to fold. But it can't be helping.

• • •

Hat tip to Melody Kramer, who wrote about the CBJ article and the Gary quote in her excellent post, "Quality vs. Quantity - the billable hour mousetrap" at the Freelance Legal Professionals blog. Also, the required-reading Greatest American Lawyer had a nice summary post a few weeks back on the CBJ article.